![]() Foreign Investment in China (5) (2008)ĭaly, J.L.: Pricig for profitability: Activity-Based Pricing for Competitive Advantage. Liaoxiaoli, Dengjie: Discussion on Activity Based Costing. Harvard Business School Press, Boston (1998) Kaplan, R., Cooper, R.: Cost & Effect: Using Integrated Cost System to Drive Profitability and Performance. Whatever the cause, Jerry’s has identified the issue by integrating its activity-based costing system with the cost variance analysis concepts discussed in this chapter.Cooper, R., Kaplan, R.: How cost accounting dissorts product costs. Perhaps the machines were operating poorly due to cutbacks in maintenance, or maybe new employees were not as efficient using the machines. The management would like to know why 575,000 minutes of actual machine time were used instead of the expected 420,000 minutes. Assume that management of Jerry’s Ice Cream chooses to investigate the $7,750 unfavorable efficiency variance associated with energy. As discussed earlier, management often establishes criteria to decide which variances to investigate. This type of costing system and resulting variance analysis provides management with further information regarding variable overhead costs and variances. Variance is favorable because the 1,600 actual purchase orders are lower than the 2,100 expected (budgeted) purchase orders. Variance is unfavorable because the actual variable overhead cost is higher than the expected cost given actual quantity of 1,600 purchase orders. *Standard quantity of 2,100 purchase orders = Standard of 0.01 purchase orders per unit × 210,000 actual units produced. SQ = Standard quantity of activity given actual production of 210,000 units. SR = Standard variable manufacturing overhead rate per unit of activity. Also, the flexible budget presented in Figure 10.11 "Variable Overhead Variance Analysis for Jerry’s Ice Cream Using Activity-Based Costing", totaling $115,500, differs from the flexible budget presented earlier since Jerry’s is using a different cost system in this example, which often results in different budgeted amounts ($115,500 = $52,500 purchase orders + $42,000 product testing + $21,000 energy).įigure 10.11 Variable Overhead Variance Analysis for Jerry’s Ice Cream Using Activity-Based Costing Note that total actual variable overhead costs remain at $100,000, but they are simply broken out into 3 activities ($100,000 = $42,000 for purchase orders + $31,000 for product testing + $27,000 for energy costs). The variance calculations are also the same except variances are calculated for three activities rather than one. Notice that the format for Figure 10.11 "Variable Overhead Variance Analysis for Jerry’s Ice Cream Using Activity-Based Costing" is the same as for Figure 10.8 "Variable Manufacturing Overhead Variance Analysis for Jerry’s Ice Cream". Figure 10.11 "Variable Overhead Variance Analysis for Jerry’s Ice Cream Using Activity-Based Costing" shows the resulting variable overhead variance analysis. Recall that Jerry’s produced 210,000 units for the year. Similar to the traditional costing approach, the variable overhead spending variance for activity-based costing is calculated for each activity as follows: How would variance analysis be implemented for a company that uses activity-based costing?Īnswer: Regardless of whether a company uses the traditional costing approach or an activity-based costing approach, the process of performing variance analysis is the same. Rather than establishing one standard variable overhead rate and standard quantity based on one cost driver, activity-based costing establishes several standard variable overhead rates and quantities, each having its own cost driver. Question: As discussed in Chapter 3 "How Does an Organization Use Activity-Based Costing to Allocate Overhead Costs?", activity-based costing focuses on identifying activities required to make a product, forming cost pools for each activity, and allocating overhead costs to products based on the products’ use of each activity. ![]() Explain how to use cost variance analysis with activity-based costing.
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